Why Electricity Pricing Remains a Mystery…and How that Has to Change

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The success of any product depends on getting the pricing right.  That’s not happening with electricity pricing. As a result, we’re not getting the most out of  energy efficiency, microgrids, solar, plug-in electric vehicles and other forms of distributed energy.

That’s the message of a new report issued August 26 by the Rocky Mountain Institute’s Electricity Innovation Lab (e-lab), which calls for fundamental changes in how utilities price electricity.

Electricity pricing changes almost constantly based on time, location and energy source. But the rates charged by most utilities – block volumetric pricing – don’t allow homes and small businesses to take advantage of these price differences.

Meanwhile, more and more distributed energy resources (DERs) are being installed that can benefit the larger grid in various ways – if they are managed properly. But little  or no financial incentive exists for homeowners and businesses to do so.

“Utilities need new rate structures that more closely align with this evolving, 21st-century grid –  categorizing, charging and compensating customers and third-party providers for the values and services their DERs provide to the grid or get from it,” said Owen Smith, RMI electricity principal.

Grid economics improves when generation is available at the right time and place, such as on a summer afternoon when a lot of air conditioners are running or in hot spots on the grid where lines are overloaded. But today’s electricity pricing rarely give homes or businesses incentive to install or manage distributed resources to meet these grid needs.

Further, to function properly, the electric grid needs not only energy but several services, such as capacity guarantees, demand response, frequency support, regulation and balancing. Power plant operators sell many of these services into the wholesale market. But few mechanisms exist for distributed generators to do the same.

The report, “Rate Design for the Distribution Edge: Electricity Pricing for a Distributed Resource Future,” recommends three changes in retail electricity pricing that would create the proper price signals for installation and best management of distributed energy.  RMI calls these the what, where and when of electricity pricing.

  1. Attribute unbundling— Breaking apart a bundled kilowatt-hour into cost- and value-based components such as energy, capacity, and ancillary services
  2. Time-based pricing—Moving to pricing structures that reflect the time-varying cost to generate and deliver electricity
  3. Location-based pricing—Shifting to pricing that better directs the deployment of DERs to the locations on the grid where they can provide the most value

Consumers may balk if change is made too quickly or if the new electricity pricing places demands on their time. So the report recommends creating multiple options, with degrees of sophistication and granularity, gradually over time.

Few will want to jump in and manage their electricity pricing in five-minute intervals; and some may never want to do so. But RMI envisions third-party services and new technologies emerging to make energy management easier for consumers.

The electricity price changes are important. Installation of solar, microgrids and other distributed energy is on the rise. Consumers and businesses will manage the installations solely to benefit their own operations, and not for the grid as a whole, unless pricing accurately reflects the advantage of doing so.

“The stakes are high in getting the transition to new pricing structures right. Every day, DER developers and customers are optimizing their investments and business models against the price signals provided by the utility, regardless of whether these prices are aligned to create the greatest value for society as a whole,” said James Newcomb, RMI managing director “Now is the time to begin the transition to 21st-century rate design.”

Can RMI’s electricity price proposal work? Join our LinkedIn Groups, Energy Efficiency Markets and Microgrid Knowledge, and tell us what you think.


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About Elisa Wood

Elisa Wood is the chief editor of MicrogridKnowledge.com. She has been writing about energy for more than three decades for top industry publications. Her work also has been picked up by CNN, the New York Times, Reuters, the Wall Street Journal Online and the Washington Post.


  1. Gavin Brennan says:

    I think various supply chain options need to be modeled with the objective of least sustainable cost of delivered energy to customers. This may mean that some elements of the chain may be suboptimal. Basic modelling I have undertaken suggests that even accounting for the benefits of distributed energy and storage , there is still a cost advantage (with subsidy distortions removed) of centralised generation and traditional networks albeit seriously under utilized! As cost of DERs comes down and incentives recognize advantages this will change. Question is what timeframe and therefore a prudent approach should be taken on investing in long term network assets.